Kohl’s Corporation — Form 10-Q Summary
Reporting period: 13 weeks ended May 4, 2013; comparative period ended April 28, 2012. The filing is for the first quarter of fiscal 2013, notwithstanding the request metadata stating 2012 Q1. Amounts are in millions except per-share data.
Business context and results
Kohl’s operates as a single business unit. It had 1,155 stores at May 4, 2013, after opening nine stores during the quarter. Sales were affected by unusually cold weather early in the quarter in several regions.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $4,199 | $4,243 | Down 1.0% |
| Comparable sales | Down 1.9% | Not stated here | Stores down 4.0%; e-commerce up 31.2% |
| Gross margin | $1,528; 36.4% of sales | $1,524; 35.9% | Up 47 basis points |
| Operating income | $317 | $321 | Down $4 |
| Net income | $147 | $154 | Down $7 |
| Diluted EPS | $0.66 | $0.63 | Up 5% |
| Operating cash flow | $305 | $417 | Down $112 |
| Free cash flow | $146 | $216 | Down $70 |
Financial position and liquidity
- Cash was $518 at May 4, 2013, versus $1,029 a year earlier. Inventory was $3,961, compared with $3,454.
- Working capital was $2,212 and the current ratio was 1.82, versus $1,960 and 1.67 at April 28, 2012.
- Long-term debt was $2,492; capital lease and financing obligations totaled $2,045, including current obligations. The company reported total debt of $4,545 for covenant purposes. Debt/capitalization was 43.0%, up from 40.3%.
- Cash used in investing was $123, including $135 of property and equipment purchases. Cash used in financing was $201, including $109 of share repurchases and $77 of dividends. Cash declined $19 during the quarter.
- Kohl’s reported compliance with all debt covenants and expected to remain compliant during fiscal 2013. Its leverage ratio was 0.53 against a maximum permitted 0.70.
Changes, outlook, and risks
- Sales declined as lower selling prices and fewer transactions outweighed increased units per transaction. Management attributed weaker transactions in part to early-quarter weather; e-commerce revenue rose 31% to $330 and contributed 210 basis points to comparable sales.
- Gross margin rate improved on lower costs and reduced inventory shortage. SG&A fell 1% in dollars but rose to 23.7% of sales from 23.6%. Depreciation and amortization increased 6%, primarily due to technology investments.
- Net income decreased, while diluted EPS increased as weighted-average diluted shares fell to 223 million from 245 million. The effective tax rate rose to 37.0% from 35.5%, partly because of favorable state tax-audit settlements in the prior-year quarter.
- Management expected modest apparel-cost decreases in 2013 and planned to open three additional stores and remodel 30 stores in the fall. No full-year earnings or revenue guidance is provided in the filing text.
- The business is seasonal, with most sales and income typically in the second half. E-commerce growth can weigh on gross margin because of product mix and shipping promotions. Management cited no significant changes to previously disclosed risk factors or market risks.
- Long-term investments were $58, primarily auction-rate securities valued using Level 3 inputs and assumptions including a seven-year redemption period. Management intended to hold them until maturity or recovery and did not expect to need to sell them early.
- Management said ordinary-course litigation was not expected to have a material adverse effect. No significant changes to contractual obligations were reported; the company reported no financial guarantees or material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the improvement in gross margin can persist as e-commerce expands and store sales remain pressured.
- Inventory levels, inventory turns, and accounts payable relative to inventory; management noted inventory was higher and accounts payable as a share of inventory had fallen year over year.
- Cash generation and free cash flow, which declined year over year, alongside planned capital spending, dividends, and discretionary repurchases.
- The assumptions and eventual recoverability of the Level 3 auction-rate securities.
- Execution of planned store openings, remodels, technology investments, and the anticipated apparel-cost trend.
On May 15, 2013, the board declared a quarterly dividend of $0.35 per share, payable June 26 to shareholders of record June 12.